Bond that will have higher interest rate risk?
A) High coupon rate
B) Low coupon rate
Thank you
Coupon and interest rate sensitivity are inversely related, the higher the interest rate risk the lower the coupon. The lower the interest rate risk the higher the coupon.
Hope this helps.
I wrote an article about this: http://financialexamhelp123.com/macaulay-duration-modified-duration-and-effective-duration/
Longer duration means higher interest rate risk; shorter duration means lower interest rate risk.
Factors leading to longer duration:
- Longer maturity
- Lower coupon rate
- Less frequent coupon payments
- Lower YTM
- Nonamortization
Factors leading to shorter duration:
- Shorter maturity
- Higher coupon rate
- More frequent coupon payments
- Higher YTM
- Amortization
(Full disclosure: as of 4/25/16 there is a charge to read the articles on my website. You can get an idea of the quality of the articles by looking at the free samples here: http://www.financialexamhelp123.com/sample-articles/.)
Thank you
My pleasure.